Long-awaited EU-Canada trade agreement agreed - a blueprint to set the standard for future investment protection?

On Friday 26 September, after five years of negotiations, the EU and Canada agreed in principle to a text for the Comprehensive Economic Trade Agreement (CETA). It is certainly comprehensive, running to 1,500 pages. It is the first such agreement signed by the EU as part of its policy (since the Lisbon Treaty) of assuming competence for trade and investment from the individual Member States. Its contents have therefore been keenly anticipated as an indication of the tone of future agreements, particularly as regards investment protection and investor-state dispute resolution (ISDS) contained in Chapter X.

CETA's provisions are comprehensive as regards both of these areas, but with significant caveats, largely mirroring the drafts that have so far been made public in the EU-US forthcoming agreement in the Transatlantic Trade and Investment Partnership (TTIP) (see our earlier post on the TTIP consultation here).

As its Preamble sets out, the agreement expressly recognizes "that the protection of investments… stimulates mutually beneficial business activity". At the same time, it stresses principles of governmental autonomy (including enforcement of labour and environmental laws) which can in some circumstances limit the rights of the investor. It also points out the responsibility of businesses to respect "internationally recognized standards of corporate social responsibility", bringing these soft law norms into the ambit of the agreement.

Investment Protection in CETA

The text (in Section 4) provides protection from both breaches of the 'fair and equitable treatment' standard and from expropriation, but it does so in a limited manner. A breach of the former will only occur in one of five specified situations:

• denial of justice in criminal, civil or administrative proceedings;
• fundamental breach of due process, including a breach of transparency, in judicial and administrative proceedings;
• manifest arbitrariness;
• targeted discrimination on manifestly wrongful grounds, such as gender, race or religious belief;
• abusive treatment of investors, such as coercion, duress and harassment.

Unlike many agreements encompassing investment protection, CETA expressly deals with the issue of the role that 'legitimate expectations' play in finding a breach of the 'fair and equitable treatment' standard. It limits their applicability to situations where a State party made a specific representation to the investor and subsequently frustrated it (Article X.10). This assimilates the body of jurisprudence on this point in order to give more certainty and potentially to limit investor claims.

As regards expropriation, investors are protected in the sense that compensation (according to the standard 'Hull' formula) is payable should it occur. However, State actions owing to 'legitimate public welfare objectives' are carved out, except where they are 'manifestly excessive' (Annex X.11). States are also allowed to take 'limited prudential measures' in the field of financial services, an exception that could be considered to significantly narrow the scope of investor protection.

Investor-State Dispute Settlement

The ISDS mechanisms are designed to provide for the direct right of an investor to bring an action against a host State for loss or damaged suffered for breach of the investor protection provisions or the provisions under Section 3 on Non-Discriminatory treatment. This would either apply to a Canadian investor against an EU Member State or the EU itself, or an EU Member State investor against Canada. Notably, however, Section 4 expressly restricts the right to bring a claim where the investment has been made through fraudulent misrepresentation, concealment, corruption, or conduct amounting to an abuse of process.

The treaty provides for a relatively broad range of ISDS options: investors will be able to bring claims under the ICSID Convention or Additional Facility Rules, the UNCITRAL Arbitration Rules or any other rules agreed by the parties (Article X.22). The UNCITRAL Transparency Rules will apply to all disputes (Article X.33), which increase the public nature of any proceedings, particularly if the proceedings are outside of the ICSID system where transparency is built in to the Rules. Both hearings and documents will be made public, although a degree of redaction of confidential information is permitted.

The default arbitral tribunal will be composed of three arbitrators with a list of arbitrators to be maintained by the Committee on Services and Investment (Article X.25). In the event of any failure to appoint (either a sole arbitrator, an entire three member tribunal or a presiding arbitrator) the Secretary-General of ICSID will make a selection from this list).

In terms of the dispute resolution process, before an arbitration can be commenced, there is a 6 month mandatory consultation phase, similar to the "cooling off" period common to many investment treaties. In addition, and more uniquely, where the dispute is brought by a Canadian investor, there is an additional step required. If, after 90 days of consultation, the dispute remains unresolved and the investor intends to initiate arbitration, it must "deliver to the European Union a notice requesting a determination of the respondent" (Art X.20). The EU will then decide whether it or the Member State will be the respondent and inform the investor accordingly, adding a potential layer of uncertainty for an investor when entering into a dispute.

CETA introduces several other innovative provisions:

• Arts X.29 and 30 (Claims manifestly without legal merit and Claims unfounded as a matter of law), allow respondents to strike out spurious claims in a 'summary' manner. These provisions are further tools afforded to the State to counter the challenge posed to their resources by ISDS. They arguably add to the pressure on the investor to adequately express and substantiate any claims brought.
• Article X.41 is a useful and detailed consolidation provision which allows for the consolidation of arbitrations arising out of separate claims which "have a question of law or fact in common and arise out of the same events or circumstances".
• Article X.39 mentions the need to exhaust appeal mechanisms before enforcement can take place. Whilst not creating an appeal mechanism itself, this has created space in the ISDS process to allow for any future such establishment, whether CETA-specific or international.

Next Steps

Overall, the agreement will provide some relief for investors, given the intensity of the anti-ISDS lobby in the context of these negotiations and those of the TTIP. Nonetheless, there are clearly areas in which this agreement falls short of the level of protection provided to investors in many bilateral investment treaties, including those between Canada and EU Member States. Although CETA does not state so expressly, it is assumed, (in accordance with Article 3 of the 2012 Regulation on transitional arrangements), that when this agreement comes into effect it will override those existing BITs. For more information about the status of agreements between EU Member States and third countries, please see our earlier blog post here.

The final text now awaits ratification by the Canadian Parliament (and potentially all of its provinces) and the EU Parliament (where it has strong support). As a 'Mixed Agreement' it also requires consent of all 28 Member States in order to become law. There have been reports of German misgivings about the ability of investors to bring actions against State parties but it is unlikely that these will derail ratification given recent confirmation by the German ambassador to Canada that Germany is fully supportive of the agreement and that it will not be possible for individual EU Member States to opt-out of ISDS or any other provisions.

For further information, please contact Matthew Weiniger QC, Partner, Joanne Greenaway, Professional Support Lawyer or your usual Herbert Smith Freehills contact.